Veronika Machová

Institute of Technology and Business

School of Expertness and Valuation

Czech Republic

machova@mail.vstecb.cz   

ORCID 0000-0001-5479-6655

Methods for risk premium: Application for agriculture companies in Czech Republic

Jiří Kučera

Institute of Technology and Business

School of Expertness and Valuation

Czech Republic

kuceraj@mail.vstecb.cz

ORCID 0000-0002-0847-7781

Sandra Kašparová

Institute of Technology and Business

School of Expertness and Valuation

Czech Republic

kasparova@mail.vstecb.cz 

ORCID 0000-0002-8015-7256 

Abstract. In business valuation, alternative cost of equity plays an important role considering the risk related to investment. Even a slight change in cost of equity can significantly affect the resulting business value. However, in the Czech Republic, risk premium has not been adequately addressed in terms of methodology. The objective of the paper is to explore the application of selected methods in calculating risk premium, and to select or modify existing methodology for the calculation of risk premium used in agricultural companies. For the purposes of determining the alternative cost of equity, three methods are selected: build up model, CAPM, and Fama and French Three Factor model; internal data of a family farm XY are used. Beta coefficient is calculated on the basis of the input data, and the results of the individual methods are compared. Based on the data of companies operating in the Czech market, the performed analysis suggests that the Build Up model is suitable for expressing alternative cost of equity. The agriculture sector is very specific, as agricultural companies are the first to be affected by the climate change. A follow-up study could be focused on the analysis and prediction of the impacts of climate change, with possible emphasis on the importance of weather derivatives for agriculture companies.

Received: December, 2021

1st Revision: February, 2022

Accepted: July, 2022

DOI: 10.14254/2071-8330.2022/15-3/6

JEL Classification: G32, D24

Keywords: risk premium, alternative cost of equity, Build Up model, CAPM, Fama and French Three Factor model